DRAFT TAXATION LAWS AMENDMENT BILLS, 2011
PRELIMINARY SUBMISSION BY BUSINESS UNITY SOUTH AFRICA (BUSA)
21	JUNE 2011

BACKGROUND

BUSA is a confederation of business organisations including chambers of commerce and industry, professional associations, corporate associations and unisectoral organisations.  It represents both big and small business across sectors on macro-economic and high-level issues that affect it at the national and international levels.  BUSA’s function is to ensure that business plays a constructive role in the country’s economic growth, development and transformation and to create an environment in which businesses of all sizes and in all sectors can thrive, expand and be competitive. 

As the apex business organisation in South Africa, BUSA represents the views of its members in a number of national structures and bodies, both statutory and non-statutory. BUSA also represents businesses' interests in the National Economic Development and Labour Council (NEDLAC).

We view our submission as important to our efforts to support Parliament in its legislative and oversight activities, as well as they high priority that BUSA places on engaging constructively with the Executive, Members of Parliament and social partners alike.

1.	INTRODUCTION

BUSA welcomes the opportunity to submit comments on the Draft Taxation Laws Amendment Bill to the Standing Committee on Finance. BUSA is cognisant that, while dealing with other vital matters as well, the Draft Taxation Laws Amendment Bills of 2011 mostly gives effect to the majority of the 2011 Budget Review tax proposals. Our general commentary will therefore reinforce some submissions made at that time.

We note the intention to cover matters outstanding from the 2011 Budget relating to the taxation of gambling winnings and contributions to retirement funds in a second set of bills, which we are looking forward to engage on once the discussion documents are made available.

The comments contained in this preliminary submission are on select issues that the broader business community was able to reach consensus viewpoints on in the time allotted. The express intention was to focus our comments particularly where constructive criticism was in order, while acknowledging that efforts to make current legislation and the tax environment in general more efficient, simpler and transparent.

We will continue to expand our comments until 4 July, by which time we need to finalise our submission to National Treasury. BUSA will send copies of this expanded version of our submission to the Standing Committee as well. 

Our comments commence with some general remarks, before it reverts to comments on particular sections, ordered according to the framework of the explanatory memorandum.

2.	GENERAL COMMENTS

Business supports the broader intention of the Draft Taxation Laws Amendment Bills to bolster inclusive growth and development, which is consistent with important overarching initiatives such as the New Growth Path, and the national aim of decreasing unemployment.

In particular, we welcome the positive intentions signalled by provisions for:
•	personal income tax relief;
•	transfer duty relief;
•	monetary threshold adjustments, including increases in capital gains exclusion mounts;
•	measures to enhance the learnership and industrial incentive programmes;
•	increases in the turnover tax exemption threshold for micro-businesses; and,
•	measures to build on South Africa’s role as a regional gateway regime.

The BUSA view is that tax policy should be used to stimulate investment in the South African economy. This approach will ensure that there is higher growth in the long run, and can so be useful in assisting government to generate higher revenues, by broadening the tax base.  The excessive use of additional taxes and special levies as revenue generating instruments can be counter-productive, as it invariably reduces South Africa’s competitiveness, by raising the costs of doing business. Further, we believe that they can distort economic activity leading to sub-optimal outcomes in the economy.

We would like to make specific remarks with respect to a possible review of the tax regime, the funding of the National Health Insurance and the option of a Carbon Tax.

2.1	Proposal for a review of the tax regime and regulatory impacts on business
BUSA proposes that a comprehensive review of taxes levied on the economy be executed. While it is accepted that the State needs to protect the quantum of its revenue, we believe that a rationalisation of its revenue streams can only be in favour of a more competitive South African economy, especially in terms of the costs of compliance and the associated administrative burden for its small tax base. While certain taxes such as personal income tax, tax on companies, interest on overdue income tax, value-added tax, turnover tax for small businesses, a general fuel levy and a plastic bag levy may be accepted as a fait accompli, others may not. Those taxes that should especially come in for review include:
•	the skills development levy;
•	donations tax;
•	estate duty;
•	securities transfer tax;
•	transfer duties; 
•	taxes on petroleum products;
•	air departure tax;
•	the electricity levy;
•	the incandescent bulb levy;
•	CO2 tax on motor vehicles;
•	Customs duties; and,
•	Stamp duties and fees.

In conjunction with this proposal, and in line with sentiments expressed in previous Budget speeches, we believe that the time is also ripe for effect to be given to a broader review with the aim of reducing the regulatory impact on business, especially small business.

2.2	National Health Insurance
We appreciate Minister Gordhan’s frankness concerning the high likely costs of the implementation of the National Health Insurance (NHI) scheme and his commitment to a consultative and a phased approach during his budget speech earlier this year. It is essential that the proposed NHI should rest on sound financial foundations.

2.3	Carbon Tax
BUSA shares the views of other stakeholders that climate change poses a substantial long term risk and that it is therefore essential to move towards a low carbon economy. Due to the complexities of designing the least cost trajectory towards a sustainable future and the potential negative impact on the economy, it is essential to undertake a careful and detailed analysis of the risks, costs and opportunities inherent in this new policy direction. BUSA has engaged actively on the Discussion Paper by Treasury on the Carbon Tax option through NEDLAC, as well as directly with the Department.  

BUSA has assisted Treasury in facilitating access to specific companies with respect to studies to be conducted with respect to the likely impact of the proposed Carbon Tax on the activities and viability of these organisations. Treasury has also indicated that it will engage with Business on sectoral basis, for which there has been lively interest from divergent sectors of the economy.
Our view is that there still needs to be much more balanced and mature debate on the merits of different alternative policy instruments to reduce greenhouse gasses while keeping the economy on a growth path and specifically with respect to the proposed carbon tax. In this regard we can ill-afford a one-dimensional focus on generating tax revenue with major negative implications for the country, especially when one considers that none of our peers in BRICS and otherwise have pursued a carbon tax. 

BUSA is, however, committed to working with Government to address the challenges of climate change and as reflected in its submission on the Climate Change Green Paper, considers the private sector as a key partner in achieving a lower carbon growth trajectory. As President Zuma indicated in his State of the Nation Address, the private sector is a key partner in achieving the employment targets that Government has set.   It is hoped that the same recognition is accorded to the role of the private sector in respect of the climate change challenge.

3.	SELECT SPECIFIC COMMENTS

Section 3.5: Assumption of contingent liabilities: taxable company acquisitions
Key provisions: Sections 1 (definition of “gross income”), Section 11F; section 24CA; paragraphs 20(1)(a) and 35(1) of the 8th Schedule

“The proposal seeks to remove the uncertainty pertaining to the tax treatment of assumed contingent liabilities when determining the total consideration of a business sale. Contingent liabilities (like fixed liabilities) will now explicitly be added to the total consideration for both the seller and the purchaser.”

Although not controversial, business is concerned that it will be difficult to determine if there is double counting involved. This could have significant impacts if large liabilities are involved in takeovers of significant size as in mining.

Section 3.6: Incentive: industrial policy project revisions
Key provision: Sections 12I(2)

“The main focus of the incentive is to promote capital expenditure.”

Business wants to comment in respect of two issues related to this section:

(i)	The changes proposed to section 12i may be very attractive in certain environments and less compelling in others. The dichotomy centres on and around the desirability of introducing innovative new technologies to the market and the trade-off that there exists between the introduction of such technologies and the labour-absorbing power of the investment that they require. The challenge for high technology intensive companies to score sufficiently on the labour component of the proposed changes may be too great to render the proposed changes effective in promoting capital expenditure. Business contends that in order for this incentive to be more effective, it should be a case of focusing primarily either on maximising labour absorption or on the promotion of new technology, but not both at the same time. The secondary incentive, which aims to contribute towards skills development, should in any event still promote inclusive growth.

(ii)	In terms of the intended use of Industrial Development Zones (IDZs) there is substantial scope for clarity. Business is of the contention that the feasibility of numerous specific types of investment projects could be significantly promoted if they could be implemented under section 12i and in an IDZ. However large undeveloped rural areas where some of these projects could arguably be housed are not classified as IDZs – projects which might greatly contribute to not only rural development but also job creation in areas of the country with the largest need. It is deemed that inland provinces such as Limpopo and Mpumalanga are particularly disadvantaged in this regard.

Section 3.7 Incentive: venture capital company revisions 
Key provision: Section 12J  

“…a general relaxation of requirements is proposed so that investor pooling of equity funds through VCC can be achieved as intended. The general relaxation will also balance with minimal anti-avoidance requirements to ensure that the regime does not give rise to tax deductions that private little or no meaningful assistance to the target group intended.”

The proposed change related to the preapproval process is encouraging, however, care must be taken to ensure that the necessary administrative capacity will be created to enable the implementation.
Section 3.8 Incentive: research and development revisions
Key provision: Section 11D

“In order for R&D non-capital expenditure to be entitled to a 150 per cent deduction, this expenditure must be directly attributable to R&D undertaken in South Africa. R&D can either be: (i) the discovery of novel, practical and non-obvious information, or (ii) the devising, developing or creation of inventions, designs, computer programs or knowledge essential to the use thereof. R&D must additionally be of a scientific or technological nature, and must either be: (i) used for production of the taxpayer’s income, or (ii) discovered, devised, developed or created for purposes of deriving the taxpayer’s income.”

Business is concerned that certain expenses that can arguably be considered Research and Development are excluded from section 11D. An example of this is the legislatively required research that is needed to introduce a chemical into the agricultural sector, where studies is required to determine the usability of a chemical or fertiliser to the South African climate and or the cost of changing the chemical to enable local use.

Section 3.10 Small business: micro-business turnover tax relief
Key provisions: 6th Schedule; paragraph 7 of Appendix 1

“The turnover tax system seeks to encourage the informal sector and other small businesses to enter the tax system by lowering the barriers of entry associated with the standard tax system. In essence, small businesses under the turnover tax system are subject to a low rate of tax on a gross basis without deductions. The turnover tax potentially applies to businesses with an annual turnover of up to R1 million.

BUSA recognises this as a mechanism to provide turnover tax relief for micro businesses. It is however so that despite this mechanism being promoted by the authorities, the take-up has not been very encouraging. Business believes the mechanism would be more effective if it was not delinked from VAT. This would reduce barriers for small businesses to enter the formal business realm more readily, especially where they may benefit from forging long-term profitable relationships with large corporates, for which VAT registration is essential. 

As it stands, the low profit margins many of the micro-businesses work with make the turnover tax relief of limited benefit. In addition the envisaged increase in firms registering formally also does not occur as the regulatory environment – extending to tax requirements and beyond to regulatory requirements in the general sense – deter firms from moving into the formal sector.

Section 3.22 Anti-avoidance: suspension of intra-group rollovers
Key provision: section 45

“Section 45 allows for rollover relief when assets are transferred between members of the same group of companies in exchange for the issue of intra-group shares or of intra-group debt. Unlike other reorganisations, this form of relief creates a market value tax cost in the newly issued shares or debt (as opposed to a rollover tax cost).”

Business advises against the suspension of section 45 for the following reasons:

(i)	The removal of the section will negatively impact on the large number of transaction utilising section 45 as it was envisaged. The removal of the section and the resultant lack of a tax neutral environment, within a group as envisaged, will provide an environment of significant complexity for any group of significant size. It has been particularly functional in terms of facilitating intragroup roll overs for the sake of group restructuring for streamlining purposes. This considered, as well as the resultant uncertainty it causes, a negative impact on investment decisions are quite likely. 

(ii)	A significant portion of BEE transactions are conducted using Section 45. Especially where 20% - 26% BEE transactions were at issue, this provision has been utilised very well to facilitate transactions resulting in a commercial result for all stakeholders involved. Arm’s length transactions that are difficult to justify in terms of economic considerations would otherwise potentially prove problematic.

National Treasury’s apparent concern with section 45:

It appears that National Treasury’s main concern in relation to the use of section 45 in merger and acquisition transactions essentially relates to the mechanism whereby a potential Purchaser acquires the shares in a Target company (“TargetCo”), followed by  a sale of the business of TargetCo, (utilising the tax roll-over provisions of section 45) to a new company (“NewCo” or “Purchasing Company”) held by the Purchaser AND where NewCo fund the purchase price with interest-bearing debt (so-called “debt push down”). In this regard, it would appear that National Treasury’s concern is that the South African tax base is eroded through the “excessive” debt gearing of the Purchasing Company, by virtue of:

(i)	“excessive” interest bearing debt resulting in “excessive” interest deductions in the Purchasing Company’s hands; and/or
 
(ii)	the debt provider (i.e. the recipient of the interest income on such interest bearing debt) not being subject to South African income tax, either where such debt provider (in the case of a South African resident entity) is exempt from income tax or not subject to tax (in the case of a non-South African entity).

How can these concerns be better addressed, thereby avoiding the suspension of Section 45?

Business believes these concerns can better addressed both through current measures available to SARS as well as suggested additional measures to be legislated.

1.	Current measures available to SARS to combat abuse/misuse of section 45 and resultant tax treatment of the interest arising from the interest bearing debt:

a.)	General Anti-Avoidance Rules in section 80A of the Income Tax Act (“GAAR”)
SARS is entitled to challenge a transaction as a whole or any leg of any transaction, where the transaction (either as a whole or any leg thereof) is a so-called “impermissible tax avoidance arrangement” as defined in the GAAR provisions. In essence for these provisions not to apply, the Purchaser and its Purchasing Company (in the above example) must have good commercial reasons, other than tax, as to why the transaction was structured in the particular manner. For example, if the sole and main purpose was only to secure an interest deduction through the debt push down, SARS can attack the interest deduction in the Purchasing Company’s hands (i.e. disregard the interest deduction) AND disallow the tax roll-over relief in the TargetCo’s hands (i.e. treat the sale of the business as if the section 45 roll-over relief do not apply and therefore subject TargetCo to Capital Gains Tax and taxable recoupments arising from the sale of the assets).

b.)	Specific Anti-Avoidance Rules contained in section 45 of the Income Tax Act
Section 45 has specific anti-avoidance measures, most notably the so-called de-grouping measure. This measure essentially stipulates that where the Seller (i.e. TargetCo in the above example) and the Purchasing Company (i.e. NewCo in the above example) WITHIN 6 YEARS cease to form part of the “same group of companies” (i.e. one of the key requirements for the section 45 relief to apply), the tax consequences of the sale of the business would be triggered in the Purchasing Company’s hands. In addition to combat the abuse/misuse of loan accounts arising from the purchase price on the sale of the assets, a de-grouping is deemed to have occurred where such loan claim is WITHIN TWO YEARS “disposed” of TO A PERSON that does not form part of the same group of companies, for no consideration, or for a non-arm’s length consideration, or by way of a distribution.

c.)	Withholding Tax on Interest
With effect from 1 January 2013, a withholding tax on interest of 10% will become effective. So where the interest is payable by a South African resident entity to a non-SA resident entity, the SA entity must withhold from such interest an amount equal to 10%. So effectively the non-resident will be taxable in South Africa on the interest received/accrued.  This should combat the scenario, where the debt provider is a non-SA resident.

This withholding tax can be reduced to 5% in terms of the provisions of any Double Taxation Agreement (“DTA”) between a jurisdiction of the Non-resident shareholder and South Africa.  Most so-called “tax havens” do not have DTAs with South Africa, which means that in such instance the withholding tax will remain at 10%.

d.)	Transfer pricing and thin capitalisation provisions
Where the debt provider is a non-SA resident which is also a connected person in relation to NewCo, the interest-bearing debt would be subject to SA transfer pricing (i.e. the interest rate has a cap) and thin capitalisation (i.e. the debt is subject to a minimum debt to equity ratio).  Where the interest rate is excessive (transfer pricing) and/or the debt in relation to equity is excessive, the interest is disallowed as a deduction AND deemed to be a dividend attracting STC at 10%.

From the above it is clear that SARS already have measures in terms whereof they should be able to combat the so-called “harmful transactions” involving section 45 of the Act.  Therefore it is not necessary to suspend section 45.  However, to enable SARS to further combat the so-called misuse/abuse of section 45 in merger and acquisition transactions, the tax legislation can be amended (see suggestions below) to provide SARS with additional measures (in addition to the above) to do so, as opposed to suspense section 45. The reason for this is that taxpayers utilising section 45 in “legitimate” transactions would be unfairly penalised.

2.	Suggested additional measures to be legislated in lieu of an immediate  suspension of section 45

Given the above measures, as well as the unfairness to taxpayers who do not misuse/abuse section 45 in merger and acquisition transactions, it is proposed that the tax legislation can be amended as follows:

a.)	The effective date of the amendment of section 45 of the Act should be some reasonable future date to enable taxpayers whose transactions that are substantially been completed to conclude and implement their transactions; and/or,

b.)	The provisions of section 45 should merely be amended to exclude the specific transactions which are of concern i.e. transactions where any associated debt will be in excess of a specific percentage or any associated debt gives rise to interest payable to a non-resident or exempt entity.